Barlow’s Research Roundup: ‘Not much has gone right of late’ for the loonie

Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow

Currency

CIBC economists Avery Shenfeld and Katherine Judge report that “not much has gone right for the Canadian dollar of late”,

“Not much has gone right for the Canadian dollar of late, but most of its weakness has reflected things that have gone right for the U.S. dollar. Whatever the U.S. currency lost from diminished safe haven flows on progress towards the end of the Iran conflict has been more than offset by other factors. Upward pressures on core U.S. inflation metrics have the Fed mulling over the need to hike rates, a contrast with Canada where core inflation has stayed much closer to the central bank’s target, allowing interest rate differentials to play in favour of the greenback. Heavy demand for U.S. equities has also tilted capital flows towards the dollar. Canadian Q1 GDP was weaker than expected, while U.S. Q2 growth has held up better than we anticipated in the face of the energy shock. There’s been no material progress revealed to markets on the CUSMA trade talks, and also on the trade front, softening oil prices will show up in a weaker nominal trade balance for Canada in upcoming months. As a result, we’ve lifted our September-end target for USDCAD to 1.40, from 1.36 in last month’s publication … While in the near term, these forces could see further pressure on the loonie, each of them should prove to be less of a burden as we move towards year end. Oil prices could recoup a bit of their recent decline if the lag to restore flows and replenish inventories is longer than markets are now pricing in. The CUSMA negotiations will drag on, but our base case assumes that the U.S. won’t exercise its nuclear option to pull out of the deal entirely. Although this is a close call at this point, interest differentials could be less of a negative for the Canadian dollar if the Fed opts to talk hawkishly but sit tight on interest rates”

The current USDCAD spot rate is C$1.42, so Mr. Shenfeld expects improvement.

Earnings

RBC Capital Markets head of U.S. equity strategy Lori Calvasini thinks expectations for Q2 earnings might be too high,

“Bottom-up consensus expects 23-per-cent growth for S&P 500 EPS in 2Q26 (yr/yr on the quarterly data point), a slower pace than the 30-per-cent growth seen for 1Q26 . Still, the bar has seemed a bit high heading into 2Q26 reporting season, at least from a data perspective. Bottom-up consensus 2Q26 S&P 500 EPS estimates (in terms of the embedded growth rates) have been moving up, which has also been the case for 3Q26, 4Q26, 1Q27, and 2Q27. Meanwhile, all sectors in the S&P 500 have experienced a positive rate of upward revisions on both EPS and revenues in recent weeks, aside from Communication Services . Overall, the rate of upward EPS estimate revisions for the S&P 500 has been tracking around 67 per cent, a bit below typical highs of 80 per cent. Digging down deeper within the S&P 500, the biggest market cap names (which have been doing the heavy lifting on earnings) have already hit peak levels of upward revisions and have slipped a bit from those levels. While there’s also been a little slippage in the rate of upward EPS estimate revisions for the other names in the index, that cohort appears to have a bit more room to run before running into past ceilings. Earnings will be quiet around the upcoming July 4th holiday in the U.S. and will start to pick up the week of July 13th. The recent wobble in the equity market may admittedly reflect the idea that earnings sentiment may need to cool off a bit”

Bubble?

BofA Securities global derivatives strategist Riddhi Prasad sees growing risk of a market bubble implosion,

“While last week’s hawkish FOMC meeting triggered a re-pricing of Fed policy and pushed front-end rates higher, the AI trade remained undeterred, continuing to trend higher despite macro headwinds (typical of bubbles building). In fact, the Nasdaq’s tech concentration (particularly its overweight to high-BRI semis like MU, INTC & AMD) has driven stark outperformance vs the S&P in both returns and vol, pushing the NDX’s Bubble Risk Indicator (BRI) closer to the key 0.8 level (beyond which we typically see elevated near-term risks in both tails). While we expect the AI bubble could take years to fully form, history shows the BRI can be helpful in identifying interim pullbacks. This divergence also reinforces our preference for owning NDX over SPX to trade an AI bubble .. via options given the two-tailed risks. While higher NDX vol has made outright long optionality more expensive, structures like call spreads … offer attractive entry points for more cheaply renting a rally, in our view”

Bluesky post of the day

Diversion

“Cops Caught Using AI to Edit Picture of Pathetic Drug Bust” - Futurism